Pay-as-you-go vs. Traditional Workers' Comp Insurance

Businesses may face a lot of issues when buying workers' comp coverage for their employees. From hefty upfront costs to messy year-end audits, budgeting troubles, and administrative burdens, companies must navigate the myriad of pitfalls to manage annual premiums.

In most states, the law requires all employers with at least one employee to maintain this type of insurance. Handling workers' compensation can be stressful and time-consuming for businesses, but it's no excuse to deny coverage to their workers. In fact, there is an alternative model to a traditional payment plan, which is not only innovative but a flexible and accurate approach to managing premiums.

At Larrimer & Larrimer, we primarily work with injured workers across Columbus, Ohio, to protect their rights following a work-related accident and fight for the compensation they deserve. Our team can also answer questions like What is pay-as-you-go workers’ comp?

While we tackle negligent employers and their insurance companies, we also understand that some genuine business owners may struggle to pay for coverage. We've created this guide to help them explore the pay-as-you-go workers' comp model. We can also advise questions like Does pay-as-you-go prevent a corkers' comp audit?

How Traditional Workers' Compensation Insurance Works

Traditional workers' compensation insurance requires businesses to pay premiums based on the estimated payroll for the year. This means that the company will provide estimates to the insurer, who will then calculate the annual payment amount.

With traditional workers' compensation, businesses have the following two options to consider:

• A lump sum premium payment

• A 10% to 20% down payment followed by monthly or quarterly premium payments

Making a hefty upfront payment can take a toll on businesses, especially small and medium-sized enterprises. It can lead to significant cash flow challenges, adversely impacting a company's operations, financial situation, and growth opportunities.

A key thing to remember with a traditional workers' comp plan is the extensive year-end audit. Since businesses pay premiums based on estimated payroll for the year, they may overestimate or underestimate payments, which could lead to refunds or an additional bill.

The year-end audit with traditional workers' compensation insurance can be messy. It can create financial uncertainty for businesses and lead to administrative burdens since relevant employees must calculate the actual payroll figures for rebates or adjustments.

Here is an example to make it easy to understand how insurance companies determine premium payments and their impact on businesses:

A small firm decides to purchase workers' compensation coverage for its five employees. The company's premium rate is approximately $0.80 per $100 of payroll, and the employer estimates that total wages for the year may reach $225,000.

Under the traditional workers' comp insurance model, the business must pay $1,800 annually. It can make a lump sum payment at the start of the year or put a down payment followed by monthly or quarterly installments. Such upfront costs can place a financial strain on the employer.

During the 12 months of operations, the business may hire more employees or reduce staff. When the year ends, the insurer conducts an audit to determine if the company has underpaid or overpaid premiums.

How Pay-as-you-go Workers' Compensation Works

To ease the financial strain associated with traditional workers' compensation, businesses may have the option to choose an alternative model, which is commonly referred to as pay-as-you-go. The insurance policy remains the same in this arrangement, but the payment structure is a bit different.

Instead of calculating the workers' comp premiums based on estimated payroll, the pay-as-you-go model uses actual payroll figures. Businesses can integrate this type of arrangement with their existing payroll provider to determine a single bill for every pay period. This includes the premium and the amount the company pays its employees.

How Is the Pay-as-you-go Model Different than Traditional Workers' Compensation Insurance?

Businesses may experience issues with their staff throughout the year. It may hire more employees, or some workers may decide to part ways. The pay-as-you-go model uses real-time payroll data instead of estimates, allowing for an accurate calculation of the premium payment.

Here's an example to show how this plan works:

A small business with five employees receives an estimated premium of $0.80 per $100 of payroll from its insurance provider. The company anticipates paying $225,000 in salaries for the year, but one employee leaves after the first month.

Under the pay-as-you-go workers' compensation insurance model, the business makes an initial payment of $150 for the first pay period, followed by $120 per month for the remainder of the year. Instead of paying the full annual coverage cost of $1,800, the company pays only $1,470 under this plan.

Pay-as-you-go vs. Traditional Workers' Comp Insurance: Weighing the Pros and Cons

Some businesses may struggle financially throughout the year after paying a hefty upfront premium. They need to understand the drawbacks associated with traditional workers' compensation and the potential benefits of switching to the pay-as-you-go model to prevent financial uncertainties.

The Challenges Associated with Traditional Workers' Comp Insurance

Even today, many businesses are paying workers' comp premiums based on estimated annual salaries instead of real-time payroll data. Here are some of the challenges these companies face when opting for this model:

Cash Flow Issues

Since the non-pay-as-you-go workers' comp insurance requires an upfront payment based on estimated payroll, a business may be strapped for cash for the remainder of the year. This can affect its relationship with vendors, suppliers, and other key stakeholders. It can even hamper growth opportunities, as the company may not have enough money to consider expanding operations.

Financial Discrepancies

During the year-end audit, a business may need to wait for a refund if it overpaid premiums. In case of underpayments, it will have to pay the additional amount. Depending on the circumstances, these discrepancies can negatively impact operations or place a financial strain on the company.

Administrative Burden

Due to the large upfront payments, insurers make adjustments at the end of the year to determine if a particular business has paid what it needs to. This can be a huge hassle for the employees working with the insurance company during the year-end audit to determine premium payments. It can redirect their focus from strategic decision-making to time-consuming administrative tasks.

The Benefits of Pay-as-you-go Workers' Comp Insurance

To avoid the challenges associated with traditional workers' comp coverage, businesses can shift to the alternative pay-as-you-go model. It offers several advantages to employers, including the following:

Improved Cash Flow Management

Since businesses have to make premium payments every payroll cycle, it alleviates the financial burden of paying hefty upfront costs. Due to this, the company may have enough cash to pay its suppliers and other key stakeholders. It can even use the money to consider growth expansion or buy important assets.

Reduced Risk of Overpayment

With the pay-as-you-go workers' comp model, businesses only pay what they owe. There is no overpayment or underpayment of premiums, which means that the year-end audits are pretty straightforward. There is no need for messy calculations, as this type of arrangement eliminates financial discrepancies.

Simplified Payment Process

When businesses integrate pay-as-you-go workers' comp insurance with their payroll providers, it streamlines operations, making it easy to make scheduled payments.

When Should Employers Consider Pay-as-you-go Workers' Compensation?

While pay-as-you-go workers' compensation offers several advantages, it may not always be the right choice for businesses. Employers must evaluate their needs and circumstances to help them choose the right insurance model for their company.

Here are a few factors that businesses should consider:

• Company size: A small firm can benefit from a pay-as-you-go plan, which offers improved cash flow management and reduced administrative workload. On the other hand, large companies can afford to pay a lump sum, and they may prefer that arrangement due to predictable expenses.

• Industry: Hospitality, construction, and retail are some industries that face staffing issues due to seasonal fluctuations. Businesses in these sectors may benefit from pay-as-you-go plans to avoid financial discrepancies. Companies with stable payrolls should go for the traditional workers' compensation insurance model, which is more predictable and manageable.

• Financial goals: Businesses that prefer a steady cash flow should stick with a pay-as-you-go model, as it lets them make smaller, more frequent payments. On the other hand, companies that are looking for budget predictability should opt for the traditional workers' compensation plan.

Can Injured Workers Recover Compensation with the Pay-as-you-go Workers' Comp Plan?

Whether a business chooses a traditional payment plan or the pay-as-you-go model, an injured worker's right to compensation after a work-related accident remains unaffected. Both options provide the same coverage to affected parties in case of a traumatic incident at the workplace but follow different financial structures.

While the law allows injured workers to seek compensation, the recovery process can be complex. Many insurance companies attempt to reduce or deny payouts, as covering claims impacts their profits. Common tactics include blaming a pre-existing condition or disputing the severity of the injuries.

Working with an experienced workers' comp attorney is crucial for injured workers, as they can protect their rights, build a strong case, and counteract any arguments to increase the affected parties' chances of making a financial recovery. It may be beneficial to hire a workers comp lawyer in Columbus.

Larrimer & Larrimer Advocates for Injured Workers in Columbus, Ohio!

If you have suffered injuries in a work-related accident, you have the right to seek workers' compensation, which covers medical expenses and a portion of lost wages. The experienced attorneys at Larrimer & Larrimer are committed to standing by your side during this challenging time and will aggressively advocate for your case. Call us to discuss your claim with a legal expert today!